The Securities and Exchange Commission has proposed to amend
Rule 15c6-1 under the Securities Exchange Act of 1934 in order to
shorten the standard settlement cycle for most broker-dealer
securities transactions from three business days after the trade
date to two business days after the trade date. The SEC indicates
that, by shortening the standard securities settlement cycle, it
expects to enhance efficiency and reduce the risks that arise from
the value and number of unsettled securities transactions prior to
the completion of the settlement, including credit, market and
liquidity risk faced by U.S. market participants, which in turn
could reduce systemic risk in the U.S. securities markets.
Currently, the standard settlement cycle for most broker-dealer
securities transactions is three business days, known as T+3. The
proposal, if ultimately adopted, would shorten the settlement cycle
to two business days, or T+2.
As proposed, the amendment would prohibit a broker-dealer from
entering into a contract for the purchase or sale of a security
that provides for payment of funds and delivery of securities later
than two business days after the trade date, unless otherwise
expressly agreed to by the parties at the time of the
The SEC originally adopted Exchange Act Rule 15c6-1 in 1993 to
establish a standard settlement cycle for most broker-dealer
securities transactions (subject to the exceptions provided in the
rule such as for contracts related to exempted securities,
government securities, municipal securities, commercial paper,
bankers' acceptances or commercial bills), effectively
shortening the settlement cycle for such securities transactions
from the then-prevailing five business day period to three business
days after the trade date (T+3). At the time, the SEC cited a
number of reasons for standardizing and shortening the settlement
cycle, which included, among others, reducing credit and market
risk exposure related to unsettled trades, reducing liquidity risk
among derivatives and cash markets, encouraging greater efficiency
in the clearance and settlement process, and reducing systemic risk
for the U.S. markets. The SEC believes that shortening the standard
settlement cycle further to T+2 will result in a further reduction
of credit, market and liquidity risk and, as a result, a reduction
in systemic risk for U.S. market participants.
Since the SEC adopted Rule 15c6-1 in 1993, not only have the
financial markets expanded and evolved significantly, but the 2008
financial crisis has taken place. Shortening the standard
settlement cycle is consistent with the current broader focus by
the SEC – in part resulting from the financial crisis –
on enhancing the resilience and efficiency of the national
clearance and settlement system and the role that certain
systemically important financial market utilities, particularly
central counterparties (so-called FMUs and CCPs), play in
concentrating and managing risk. The SEC also notes the significant
technological developments in the industry since it first mandated
T+3 settlement in 1993, which it believes will help to facilitate
further shortening of the settlement cycle.
The proposed amendment to Rule 15c6-1, if adopted, would
prohibit a broker or dealer from entering into a securities
contract that settles later than the second business day after the
date of the contract unless expressly agreed upon by both parties
at the time of the transaction, subject, as in the current version
of the rule, to certain exceptions. If adopted, the proposal would
not affect the current ability in most firm commitment underwritten
transactions to use a T+3 or, if priced after 4:30 p.m. U.S.
Eastern time, a T+4 settlement cycle; nor would it affect the
ability of the parties to any particular transaction to agree
expressly to a settlement cycle that is longer than T+2.
Request for Comment
The SEC is requesting comment regarding all aspects of the
proposed amendment to Rule 15c6-1. The SEC is also requesting
comment on a number of specific questions set forth in the
proposing release. Not only is the SEC seeking comments, it is also
asking commenters to submit any relevant data or analysis along
with their comments. You can find the proposal, along with
information on how to submit comments, on the SEC website. Comments
must be submitted prior to December 5, 2016.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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